This document discusses tax planning strategies for salaried individuals, dividing them into salary restructuring and investing in tax-saving devices. For salary restructuring, it recommends structuring salary to include tax-exempt allowances like housing, uniforms, education, etc. It also discusses commuting pension and transferring provident funds. For tax-saving investments, it lists options under sections 80C, 80D, 80E, 80G, etc and explains how to claim deductions and maximize tax savings within the specified limits.

1. TAX PLANNING FOR SALARIED
INDIVIDUALS

2. • Conceptually, tax planning for salaried
assessees can be divided into two broad
categories namely:
– Salary Restructuring; and
– Investing in Tax saving devices.

3. Salary Restructuring
• An employee can structure or restructure his salary so
as to reduce the tax outgo on his total salary by
availing of exempt allowances, benefits and
reimbursements.
• There are certain allowances, benefits and re-
imbursements that are either exempt from tax or
valued at a lower rate depending on certain
conditions.
• The salary can be restructured in a way as to separate
the allowances, benefits and actual re-imbursements
from the salary component and avail the tax benefits
allowed on these.

4. • Normally the employer pays the salary and
the employee makes an expenditure out of
that.
• However there are certain expenditures for
which the employer makes a specific
payment, there are tax benefits associated
with such payment.

5. • Therefore if an employee is likely to incur such
expenditure that
• if taken in the form of an earmarked payment
separate from the salary and paid by the employer,
• provides tax benefits, he could utilize the tax benefit
by taking payment for such expenditure as a benefit,
allowance or a reimbursement
• and separate it from the salary component.

6. Examples of such earmarked benefits (separate
from the salary) are below:
• Rent Free Accommodation or House Rent Allowance
can be availed in case the taxable income is low.
• If the taxable income is high the valuation of the
perquisite could be high resulting in greater tax
outgo.

7. • Uniform allowance: Expenses on purchases and
maintenance of employees’ uniform can be paid or
reimbursed by the employer.
• Uniform allowance is not considered as a perquisite
u/s 10 (14).
• This however needs to be a uniform and not any civil
dress.

8. • Education allowance: If any allowance is received for
education and hostel stay of employees’ children
from the employer, exemption can be claimed u/s10
(14).

9. • Telephone facility received by an employee at his
residence is not taxable in the hands of the
employee as against telephone allowance which is
fully taxable.

10. • The employee can avail the facility of a company car
(as also its maintenance and running expenses) from
the employer.
• The perquisite value is nominal considering actual
expenses on car.

11. • Medical reimbursements are exempt up to Rs.15,000
p.a. as against medical allowance which is fully
taxable.
• These could be structured as a part of the salary.

12. • Uncommuted pension is taxable all
employees.
• Employees could get their pension commuted
in order to avail tax benefits.
• Commuted pension is fully exempt from tax in
the case of govt. employees and partly
exempt from tax in the case of non govt.
employees who can claim relief u/s 89(1).

13. • An employee, being a member of a recognized
provident fund,
• who resigns before completing five years of
continuous service,
• should ensure that he joins a firm which maintains a
recognized provident fund
• because the accumulated balance of the provident
fund with the former employer will be exempt from
tax
• provided the same is transferred to the new employer
who also maintains a recognized provident fund.

14. • The employer’s contribution towards
recognized provident fund is exempt from tax
up to 12 per cent of salary.
• Employees could take the benefit of this
exemption.

15. • Pension received in India by a non- resident
assessee from abroad is taxable in India.
• If however, such pension is first received by or
on behalf of the employee in a foreign country
and then remitted to India, it will be exempt
from tax.

16. • Leave travel concession is not taxable in the
hands of employees if certain conditions are
satisfied.
• This is another option for employees who
travel and would like to utilize the tax benefit.

17. Investing in Tax Saving Devices:
• The second method of tax planning is by way
of investment in designated schemes.
• There are many schemes that are listed by the
Income Tax Department and these are to be
found in Section 80 of the Income Tax Act.
• The largest is Section 80C.There is an overall
ceiling for the total investment under section
80C, which currently is Rs 100,000.

18. • Similarly for Section 80D, the ceiling is Rs 15,000.
• If you make an investment in schemes mentioned in
these section, the amount so invested is allowed as a
deduction from your total income before computing
the tax.
• The schemes normally follow the principle of
exempt-exempt-tax or exempt-exempt-exempt at
the stages of contribution-accumulation-withdrawal
respectively.

19. Section 80C products
• Bank deposits: Term deposits in a scheduled
bank with a minimum period of five years
notified under the Bank Term Deposit Scheme,
2006, not only give you a fixed and assured
return (around 8 per cent), but also a tax
advantage.
• Term deposits are a one-time investment and
there is no commitment to pay in the future.
• But remember that the entire interest income
from such deposits is taxable.

20. • Employee Provident Fund: This is a forced
saving for employees and helps them save for
retirement.
• Every month, 12 per cent of your basic salary
is deducted and put into a kitty maintained
either by the government or your company's
trust.

21. Example of Investments Deductions available
Amount Your
numbers
(in Rs)
Sections When, where and how much of deductions
Insurance premiums Rs 20,000 80C Rs 1 lakh in specified instruments like life insurance and
ELSS
Public provident fund Rs 70,000 80CCC Pension plans of life insurance companies; 80C limit
stands reduced by 80CCC investment
Investment in ELSS Rs 10,000 80D Rs 10,000 deduction on mediclaim, Rs 15,000 for senior
citizens
Medical Insurance
Premiums
Rs 10,000 80DD Rs 50,000 reduced from total income of a person with a
handicapped dependent
Donations Rs 5,000 80DDB Rs 40,000 and Rs 60,000 (sr citizen) deduction for
expenditure on treatments of special diseases
Other deductions Rs 0 80E Interest on education loan - entire amount tax
deductible
80G Donations (all donations don't qualify for 100%
deduction)
80GG Deduction according to formula for rent paid for housing
Rs 1,15,000 -- Total
Deductions
80U Rs 50,000 deduction from total income for handicapped
persons

22. Public Provident Fund
• This is a self-directed investment option. It is
essentially a 15-year investment that gives a
tax-free return of eight per cent as of now.
• The rate is subject to change.
• Investments of Rs 500-70,000 qualify for a tax
deduction under Section 80C.

23. Home loans
• The total amount eligible for deduction is up
to Rs 100,000 a year for the principal amount

24. Children's fees
• Parents can claim a deduction for tuition fees
for a maximum of two children within the
overall limit of Rs 100,000.
• However, payment towards development fees
or donations to the institution is excluded.

25. National Savings Certificates
• These are for those who are less averse to
risk.
• This government-backed security is available
at post offices and gives an interest rate of
eight per cent, compounded half-yearly as of
now.
• The interest is entirely taxable.
• NSCs are good for those in lower tax slabs
with an investment horizon of six years.

26. Equity-linked savings schemes
• These are mutual fund products and carry market risk.
• Like all tax saving options, these plans have a lock-in period of three years.
• An ELSS is like any other equity fund.
• However, the lock-in period is three years.
• It comes with all the usual trappings of an equity fund, including the
choice between dividend and growth options, and systematic investment
plans (SIP).
• Under the IT Act, investors investing in an ELSS can claim benefits under
Section 80C.
• The limit under this Section is Rs 1 lakh.
• The dividends earned in an ELSS are tax-free.
• The returns at maturity are also tax-free.

27. Life insurance
• Your life cover premium is eligible for a tax
deduction up to Rs 1 lakh under Section 80C.
• If the premium paid in any of the years is
more than 20 per cent of the sum assured,
then deduction will be allowed only up to 20
per cent of the sum assured.

28. Pension plans
• If any investment is made under this section,
then the qualifying amount under Section 80C
stands reduced to that extent.
• Investment in insurance and mutual fund
pension plans also comes under this section
with an overall limit of Rs 1 lakh.

29. Section 80C investments
Plans available Interest
(%/yr)
Tenure (yrs) Tax status of
returns
Features
Bank fixed deposit 8 5 Entirely
taxable
Deposits up to Rs 1 lakh per
bank per branch insured
Employee Provident
Fund
8.5** Till
superannuation
Tax free Interest is normally announced
every April
National Savings
Certificate
8 6 Entirely
taxable
Highest safety
Public Provident Fund 8** 15 Tax free Withdrawals, loans available
Equity-linked savings
schemes
Market
linked
3 minimum Tax-free Dividend and capital gains are
tax-free
Life insurance -
endowment
IRR of 4-7 10-30 Tax-free Life insurance cover
Life insurance - unit
linked
Market
linked
5-30 Tax-free Life insurance cover
Pension plan
(insurance)
Market
linked
Till age 45 Pension
taxable
Benefit u/s 80CCC within
overall limit of 80C
UTI - Retirement
Benefit Pension Fund
Balanced
Fund
Till age 58 Capital gains
tax
Templeton India
Pension Plan
Balanced
fund
Till age 58 Capital gains
tax

30. Health insurance
• Under Section 80D, medical cover premium is
tax-deductible up to Rs 10,000, with an
additional deduction of up to Rs 5,000 if the
policy is in the name of a senior citizen (65
years or older)
• and the premium is paid by him.
• If someone below 65 buys a plan for his
dependents, he can avail benefit upto Rs
15,000.

31. Educational loan
• The interest on loans taken for higher
education is also eligible for deduction from
your total income under Section 80E.
• There is no monetary ceiling on the interest
you can claim as a deduction.
• The loan must have been taken from a
financial institution or an approved
educational institution.

32. Charity
• To avail tax benefits under Section 80G,
donations must be made only to specified
trusts.
• The tax breaks vary according to the trust to
which you have donated.

33. Medical treatment
• Any expenditure for the medical treatment
(including nursing) of a handicapped person,
training and rehabilitation of a person suffering
from a permanent physical disability (including
blindness) or from mental retardation,
• qualifies for a deduction under Section 80DD
upto Rs 50,000.
• In case the disability is severe, the claim can go
up to Rs 75,000.

34. Questions for Revision
• Give five ways that you would structure your
salary to save tax ?
• What investments would you make to save
tax and why ? Make your portfolio of tax
saving investments ? What is the tax saving
from your portfolio ?

35. The End